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I was in a similar ish situation a few years back. I was making around 150k and had 115k in student loans. I decided to refinance from federal to private through lendkey and got mine down to 1.9% variable rate. I then basically did a split of investing and payoff. Put together a plan to pay off in 4-5 years (they’re on a 10 year term) and started heavily investing the rest. I ended up getting some big raises since then so I will likely be able to pay off in 3-3.5 years while still heavily investing.
I know I’m missing out on some market upside since I could very likely earn more than 2% but it’s also de-risking my future for me to give me more flexibility to take on higher risk opportunities (quitting my job to travel for a year, starting my own company, joining an early stage startup, etc) and started to help out with debt to income ratios since I knew I would want to buy a house in a couple years. It was the right balance for me but YMMV
Yes, I am looking into my options now.
Nothing beats the pleasure of being debt free. Given your interest rate, I would recommend paying off ASAP and then jumping in the market head on
I also agree with this.
A different way to think about this...the student loan “investment” is a guaranteed return, but it is a completely illiquid one...you can’t take that money back out to live on in the case of a job loss, disability, spending need, etc...so if it were me, I’d refi around that 9/30/21 mark when 0% interest period ends and take advantage of the ability to do less than 3% over 10-20 year terms. At $200k and single, you’ve got at least $22k or so taxed at 32%, so I’d say you really have to prioritize pre-tax deductions(Trad 401k, HSA, etc) or else the opportunity cost you are facing is 32% PLUS the return differential between risky assets/stocks(assuming you are suited for said investments) and the less than 3% refi’d rate...the next bracket is still 24% and if there were anyway to shield that, I’d do it too...but you’ll likely run out of pre-tax deductions before you get too far into that bracket. It is almost impossible to figure out how much better the investing option is for you...but I’d take advantage of the low rates and be disciplined about investing a large percentage of income...if you lack spending discipline, then paying off the loans aggressively may indirectly help instill some budget discipline...ultimately the best option is going to be the one you can pour the most “fuel”/income into...almost all financial goals are achieved 1st by savings rate(percentage of income saved toward goal) and so if you are willing to commit 30% more into paying off debt than investing and are much more committed to that strategy, it could turn out to be the right one for you. However, the pre-tax savings are likely sooo much better that I’d twist your arm to do that at minimum.
Yes, I am maxing out HSA and 401k. I need to do some research on the back door Roth IRA because my income, as it stands, is too high to take advantage of traditional Roth IRAs
Consider refinancing with First Republic. Mine are 2.6% fixed for 10 years which would save you some major coin.
They run a referral bonus for about $200, dm if interested
The answer about whether to prioritize debt payments or investing depends on your age and temperament but my guidance would be to max all tax advantaged retirement space before any extra SL payments
I think one thing that hasn’t been said is that you should max the tax advantages savings first.
Most obviously, do whatever you need to get the 401k match. If it’s a 1:1 match, then that’s basically 100% return in year 1.
The math likely also works out for the remaining portion of your 401k up to the max. And the backdoor Roth IRA.
Then I’d agree to pay off debts. Another point here: you have a ‘guaranteed’ return of 5% in paying off your loans, vs. some risk associated with 5-7% stock return AND tax on top of that. Debt is the right choice to pay off
Coach
I'm in my mid-40's. With what I know now, here's what I would do if I were you:
- Contribute to your 401k just enough to get the match (free $$$)
- Throw everything you can at the student loan to get rid of it ASAP.
- Ignore all the talk of interest rates, better ROI, etc. Student loans are the most lethal of all loans. You're making serious bank now, so treat it as an opportunity and get that debt off your plate. Then, if your income continues, you can catch up on that savings really quick. And, if something happens and you lose your job, you won't have that on your plate.
Good luck!
Yes, it’s depressing to see my student loan remain the same because of the 5% interest rate. It makes me feel so discouraged sometimes-hence why I want to attack it aggressively. Thank you for the insight.
Ok, so don't play the interest game. 250k is a significant amount of student loan debt which should scare you. You never know what could happen tomorrow or a year from now. One strategy is just stop all investing including retirement and attack the loan and knock it out as soon as possible. Another way is keep investing in 401k, hsa etc so you're not missing out on market gains and time in the market, but everything else goes towards student loans.
People will try to convince you about interest rate numbers, but at the end of the day - being debt free is an amazing feeling.
This so much.
I went to a public university so I didn't have any debt when I graduated college, but my husband and I just paid off our mortgage and our car. It is so nice to know that one of us can stop working and we can easily cover our bills still.
It’s all about interest rates. If your student loans are at 2% (or you can refi to 2% using SoFi or similar) but you can get a 5-7% return on ETFs/the stock market (historically you can but no one can predict the future) then you can imagine how investing is a better use of your today dollars than aggressively paying down student loans beyond minimum payments. You can find some online calculators to run some scenarios mapping out how the compound interest will play out at different rates.
There’s a nice mental effect to having “no debt” but it’s not always logical.
Yes, my interest rate is 5% now. This advice is solid if I can get my interest rate below the 5% to 7% return because, as I stand, they seem to cancel each other out.
Backdoor Roth is pretty simple as long as you don’t have any Traditional IRA assets(or can roll said assets into 401k).
I would max out your 401(k) each year at 19,500 and put the rest toward student loans. I second the chorus of folks telling you to refinance also. You never know where life will take you and having that extra 3-5 years of 401(k) savings will give you a big start on saving for retirement. If you extend your student loan plan a few additional years to accommodate the savings, you'll still be in a much better place in 3 years and you'll feel like your debt is manageable. Then you can always skip a year of savings and knock it out or you'll feel so much better that it's a manageable number that you'll just stick with the plan.
Yes, I think this is a great strategy. I plan to max out both HSA and 401k while looking to refinance at a lower interest rate.
Where are your loans (federal or private?) what interest rate? Federal is deferred interest right now which means at least 6 months of market gains right now. Also depends on interest rate vs the rate of return you expect. No one really knows what the market will do in the short term so you need to weigh your own risk level with more information than you’ve given us here
This was about two years ago, so I don’t really remember, but the ask was not this simple. And there was a lot of paperwork involved. However, I am still going to look into it again since it is a recurring name.
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A s l ? Dm
If you don’t mind me asking - what sector do you work in to make that much as an associate?
Big Law. Mid-level associate. Go big or go home, baby. Just kidding. 😂
Are your student loans federal or private? It matters. Carry federal forever.
They are private. I refinanced two years ago.